Token Standards

Tokenization of RWAs and of funds and their strategies require regulatory consideration, given that these assets are regulated as securities offchain. Unlike DeFi, most of the traditional financial instruments being brought onchain require users to be accredited investors or institutions that must comply with existing and evolving AML/KYC regulations.

Therefore, token standards for RWAs can be used to ensure KYC/AML compliance and provide permissioned transferability capabilities by enshrining certain constraints in the smart contract. However, different token standards for RWAs are not only used for regulatory purposes. For RWAs that are of a more decentralized nature, token standards are used to standardize methods of passing on income to users safely.

• ERC-20

The ERC-20 standard defines a common list of rules for Ethereum tokens to follow within the Ethereum ecosystem, facilitating widespread compatibility with various wallets and exchanges. It includes basic functionalities like transferring tokens and checking account balances, enabling developers to create functionally predictable tokens that can interact seamlessly across the platform​​.

• ERC-721

ERC-721 introduces a standard for Non-Fungible Tokens (NFTs) on Ethereum, which allows for the tracking and trading of unique individual tokens. This standard supports functions that permit users to inquire about the owner of a specific token and the total supply of tokens. It is especially useful for representing ownership of unique assets like digital collectibles​​.

• ERC-1155

The ERC-1155 standard represents a new form of token standard that can create both fungible (similar to ERC-20) and non-fungible (similar to ERC-721) tokens using a single contract. This multi-token standard allows for more efficient transactions and the ability to include detailed metadata and attributes that describe the token's properties. It also supports batch transferring which can reduce transaction costs​​.

• ERC-1400

The ERC-1400 token standard is particularly suitable for regulatory compliance, as it can be programmed to only be transferable to certain parties or automatically comply with sanctions lists. ERC-1400 was developed prior to ERC-3643, and can be viewed as its predecessor.

• ERC-3643

ERC-3643s are permissioned tokens that have conditional transfer functions requiring approval from decentralized validators based on predefined rules. This permissioned structure suits use cases which enable compliance such as dealing with securities, while maintaining the standard ERC-20 functionality due to their underlying architecture. Unlike ERC-1400, ERC-3643 is able to freeze tokens, perform batch functions (leading to savings on gas), and provide token recovery processes.

• ERC-2222

ERC-2222, the Funds Distribution Standard, can be used for payments such as dividends, loan repayments, fee, or revenue shares among token holders. Token holders are seen as fractional owners of future cash flow. ERC-2222 is an extension built upon ERC-20 and is therefore backwards compatible.

• ERC-4626

ERC-4626 is a tokenized vault standard that makes it easier for applications to integrate with vaults. ERC-4626 was explicitly developed to standardize tokenized vaults to reduce errors, attack vectors, and integration time for developers.

These ERC standards enable a broad range of functionalities from simple token transfers to complex operations involving unique digital assets and financial instruments. Each caters to different requirements within the Ethereum blockchain ecosystem, enhancing the overall flexibility and efficiency of blockchain applications.

We can expect an increase in token standards to go through the proposal process as the number of RWA use cases increases. Within this trend we expect two separate movements. On one side, there are the niche ERC standards tailored to specific use cases. On the other hand there will be the creation of general purpose ERC proposals like the ERC-7208 (onchain data containers). We should see a balance between general purpose ERC standards for the most generic RWA tokenisation use cases supplemented by specific-purpose standards for new or niche use cases.